Chapter 10, Problem 4PA

1.

To determine

Identify the numbers of shares of preferred stock that have been issued.

Answer to Problem 4PA

Number of preferred stock issued by the V World is 6,000,000 shares.

Explanation of Solution

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Compute the number of preferred stock issued by the V World:

$\begin{array}{c}\text{Preferred stock issued }=\frac{\text{Preferred stock value}}{\text{Par value per share}}\\ =\frac{\$6,000,000}{\$1}\\ =6,000,000\text{ shares}\end{array}$

Hence, the number of preferred stock issued by the V World is 6,000,000 shares.

2.

To determine

Identify the numbers of shares of common stock that have been issued.

Answer to Problem 4PA

Number of common stock issued by the V World is 30,000,000 shares.

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Compute the number of common stock issued by the V World:

$\begin{array}{c}\text{Common stock issued }=\frac{\text{Common stock value}}{\text{Par value per share}}\\ =\frac{\$30,000,000}{\$1}\\ =30,000,000\end{array}$

Hence, the number of common stock issued by the V World is 30,000,000 shares.

3.

To determine

Ascertain the average price per share at which the preferred share would have been issued.

Answer to Problem 4PA

Average price per share for which the preferred share would have been issued is $50.

Explanation of Solution

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Step 1: Calculate total paid in capital for common stock.

$\begin{array}{c}\begin{array}{l}\text{Total paid in capital}\\ \text{for common stock}\end{array}\}\text{=}\left[\begin{array}{l}\text{Number of common shares issued}\times \\ \text{Issue price per share}\end{array}\right]\\ =30,000,000\times \$30\\ =900,000,000\end{array}$

Step 2: Calculate total paid in capital for preferred stock.

$\begin{array}{c}\begin{array}{l}\text{Total paid in capital}\\ \text{for common stock}\end{array}\}\text{=}\left[\begin{array}{l}\text{Total paid in capital}-\\ \text{Total paid in capital}\text{for common stock}\end{array}\right]\\ =\$1,200,000,000-\$900,000,000\\ =\$300,000,000\end{array}$

Step 3: Calculate the average price per share for which the preferred share would have been issued.

$\begin{array}{c}\begin{array}{l}\text{Average price per share}\\ \text{for which the preferred}\\ \text{share would have been issued}\end{array}\}=\frac{\text{Total paid in capital for preferred stock}}{\text{Number of preferred shares issued}}\\ =\frac{\$300,000,000}{6,000,000}\\ =\$50\end{array}$

Hence, the average price per share for which the preferred share would have been issued is $50.

4.

To determine

Ascertain the amount of net income for the year.

Answer to Problem 4PA

The amount of net income for the year is $68,000.

Explanation of Solution

Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Determine the amount of net income for the year as follows:

$\begin{array}{c}\text{Net income }=\left[\begin{array}{l}\left(\text{Ending retained earnings}+\text{ Dividends}\right)\\ -\text{Beginning retained earnings}\end{array}\right]\\ =\left(\$288,000+\$30,000\right)-\$250,000\\ =\left(\$318,000-\$250,000\right)\\ =\$68,000\end{array}$

Hence, the amount of net income for the year is $68,000.

5.

To determine

Ascertain the average cost per share of the treasury stock acquired.

Answer to Problem 4PA

Average cost per share of the treasury stock acquired is $32.

Explanation of Solution

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

$\begin{array}{c}\text{Average cost per treasury stock }=\frac{\text{Total value of treasury stock}}{\text{Number of treasury stock held}}\\ =\frac{\$352,000}{11,000}\\ =\$32\end{array}$

Hence, the average cost per share of the treasury stock acquired is $32.